Trends in Discretionary Spending

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1 D. Andrew Austin Analyst in Economic Policy Mindy R. Levit Analyst in Public Finance September 10, 2010 Congressional Research Service CRS Report for Congress Prepared for Members and Committees of Congress RL34424

2 Summary Discretionary spending is provided and controlled through appropriations acts, which fund many of the activities commonly associated with such federal government functions as running executive branch agencies, congressional offices and agencies, and international operations of the government. Essentially all spending on federal wages and salaries is discretionary. Federal spending in 2010 is estimated at just under a quarter (24.5%) of the U.S. economy, as measured by gross domestic product (GDP). Federal spending since 1962 has averaged about a fifth of GDP. (Years denote federal fiscal years unless noted otherwise.) Discretionary spending accounted for 37.8% of total outlays in 2010, as extraordinary federal responses to financial turmoil sharply increased mandatory spending (56.15% of outlays in 2010), reducing discretionary spending s share of total spending. Net interest accounted for 6.1% of federal outlays in In 1962, discretionary spending accounted for 47.2% of total outlays and was the largest component of federal spending until the mid-1970s. Since then, discretionary spending as a share of federal outlays and as a percentage of GDP has fallen. The long-term fall in discretionary spending as a share of total federal spending is largely due to rapid growth of entitlement outlays and slower growth in defense spending relative to other federal spending in past decades. Discretionary spending is often divided into defense, domestic discretionary, and international outlays. Trends in those categories may indicate broad national priorities as reflected in federal spending decisions. Defense and domestic discretionary spending compose nearly all of discretionary spending. In 1962, discretionary spending equaled 12.3% of GDP, with defense spending making up 9.0% of GDP. In 2010, total discretionary spending is estimated to fall to 9.3% of GDP with defense spending totaling 4.7% of GDP. Military spending has increased sharply over the last decade. On average, from 2000 to 2010, defense outlays grew 6.8% per year in real terms, whereas non-defense discretionary outlays grew 5.6% per year in real terms. The G. W. Bush and Obama Administrations each created their own division of security and nonsecurity spending. Dividing spending into security and non-security components, however, presents many conceptual and practical difficulties. Some federal activities, such as Coast Guard patrols, advance non-security and security interests. Furthermore, federal programs tasked with non-security aims in normal times may respond to specific homeland security challenges. Nondefense security discretionary budget authority increased sharply after Hurricane Katrina, although changes in outlays were less dramatic. Non-defense non-security outlays, which have ranged between 3% and 3.5% of GDP since the mid-1980s, are estimated to reach about 4% of GDP in 2010, largely due to economic stimulus measures and other recession-related spending. The Obama Administration in its recent budget submission called for a three-year freeze on nonsecurity discretionary spending. Weak economic conditions have depressed federal revenues and may continue to increase government social safety-net expenditures. Some contend that additional stimulus measures are needed to reduce high unemployment levels, while others have called for imposing greater budgetary stringency. Over the long term, projected future growth in entitlement program outlays may put severe pressure on discretionary spending unless policy changes are enacted or federal revenues are increased. This report will be updated as events warrant. Congressional Research Service

3 Contents What Does Discretionary Spending Include?...1 Budget Authority and Outlays...1 Trends in Discretionary Spending...2 How Has the Composition of Discretionary Spending Changed?...3 Discretionary Spending and National Priorities...6 Discretionary Defense Spending...6 Discretionary Domestic Spending...8 Discretionary International Spending...8 Discretionary Security and Non-Security Spending...8 What is Homeland Security or Security Spending?...9 Trends in Security and Non-Security Discretionary Spending Fiscal Stimulus and the Budget...15 The FY2011 Budget and Beyond...16 Discretionary Spending in the Long Term...16 Figures Figure 1. Discretionary Outlays by BEA Category As a Percentage of Total...4 Figure 2. Components of Federal Spending, FY1962-FY Figure 3. Discretionary Outlays By Broad Category...7 Figure 4. Defense and Security Spending...10 Figure 5. Discretionary Budget Authority by Type Using FY2011 Definition of Security...13 Figure 6. Discretionary Outlays by Type Using FY2011 Definition of Security...14 Figure A-1. Discretionary Budget Authority by Type...20 Figure A-2. Discretionary Outlays by Type...21 Tables Table 1. Categories of Federal Spending...2 Table 2. Average Real Growth in Discretionary Spending...12 Table A-1. Listing of Items Included in Security Category...19 Appendixes Appendix. Approximating the Definition of Security Spending Used in the G. W. Bush Administration...18 Congressional Research Service

4 Contacts Author Contact Information...22 Congressional Research Service

5 What Does Discretionary Spending Include? Discretionary spending is provided in, and controlled by, annual appropriations acts, which fund many of the routine activities commonly associated with such federal government functions as running executive branch agencies, congressional offices and agencies, and international operations of the government. 1 Essentially all spending on federal wages and salaries is discretionary. 2 Discretionary spending is often contrasted with mandatory, or direct, spending. Mandatory spending includes federal spending on entitlement programs, the Supplemental Nutrition Assistance Program (formerly known as the Food Stamps program), and other spending controlled by laws other than appropriation acts. 3 Spending levels for mandatory programs are generally controlled by eligibility criteria and size of the eligible population. Budget Authority and Outlays The distinction between outlays and budget authority is important to understanding the federal budget and, particularly, discretionary spending. Appropriations legislation, which controls discretionary spending, grants budget authority to accomplish specific ends. Budget authority is what federal agencies can legally spend. Budget authority has been compared to funds deposited into a checking account, which then can be used for specified federal purposes. Outlays are disbursed federal funds. Therefore, an outlay is not recorded until the federal government disburses appropriated funds to purchase goods and services. Table 1 illustrates the different categories of federal spending (i.e., mandatory and discretionary spending) by contrasting the type of budget authority needed for specific purposes. Outlay data are used to assess the macroeconomic effects of the federal budgets, whereas budget analysis of specific federal programs is typically based on budget authority, because that is what Congress controls directly. Congressional appropriations, which grant budget authority for specific purposes, are not always tightly linked to changes in outlays in the following year. While budget authority can be granted for a single year, some appropriations (such as for many military construction projects) provide budget authority for multiple years, or indefinitely. Thus outlays that flow from an appropriated sum might be spread over several fiscal years, implying that budget authority totals will differ from outlay totals for a single fiscal year. 4 1 Annual appropriations acts fall within the jurisdiction of the House and Senate Appropriations Committees. 2 Exceptions exist. For example, salaries for Members of Congress, the President, and federal judges are classified as mandatory spending, as are essentially all federal retirement and disability costs. Direct spending is controlled by committees with legislative jurisdiction. 3 For details, see CRS Report RL33074, Mandatory Spending Since 1962, by D. Andrew Austin and Mindy R. Levit. 4 While federal officials often have some discretion to choose how quickly appropriated funds are spent, they face constraints imposed by legislation designed to protect Congress s power of the purse. According to the Anti-Deficiency Act, a federal official cannot spend government money beyond what is available through appropriations or a fund by law. See Government Accountability Office, Antideficiency Act Background, available at antideficiency.htm for code citations and explanations. The Congressional Budget Act and Impoundment Control Act of 1974 (P.L ) limits the ability of federal officials to withhold or delay spending of appropriated funds without Congressional approval. Congressional Research Service 1

6 Table 1. Categories of Federal Spending Entitlement Not an Entitlement Budget Authority Provided by Law Other than Appropriation Acts Medicare Social Security Salaries for Members of Congress Mandatory non-entitlements (e.g., Forest Service payments to states) Budget Authority Provided by Appropriation Acts Appropriated Entitlements (e.g., veterans compensation, Medicaid, TANF a ) SNAP b (with caveats) Discretionary Spending c (defense, non-defense domestic discretionary, and international) Source: Compiled by CRS. a. Temporary Assistance for Needy Families. b. The Supplemental Nutrition Assistance Program (SNAP) was formerly known as the Food Stamps program. c. Discretionary spending programs. See discussion in text. Trends in Discretionary Spending The composition of the federal budget has changed dramatically since the early 1960s. Over time, the share of total discretionary spending in federal spending has fallen, whereas the share of mandatory spending has increased. Discretionary spending accounted for 67.5% of total outlays in 1962, but only 37.8% of total outlays in Mandatory spending, by contrast, rose from 26.1% of total outlays in 1962 to 56.1% in Net interest accounted for 6.1% of federal outlays in In contrast to the longer term trends, between 2000 and 2010, discretionary spending grew more quickly than mandatory spending. After falling for three decades between the late 1960s and the late 1990s as a share of the economy, discretionary spending increased 6.2% a year in real terms on average from 2000 to Over the same period, the share of discretionary spending as a proportion of federal outlays grew from 34.4% in 2000 to 37.8% in The economic recession that began in late 2007 reduced incomes and increased unemployment, which in turn increased the number of people eligible for income support programs and outlays on some discretionary programs. Extraordinary federal responses to financial turmoil in 2008 and 2009, however, increased mandatory spending even more sharply, which reduced the share of discretionary spending in federal outlays. More normal financial conditions and renewed economic growth in the second half of calendar year 2009 helped moderate spending on some mandatory programs and stem decreases in Medicare and Social Security payroll tax revenues. While the economy began growing again in calendar year 2009, growth in 2010 has been weaker than expected. Estimates put real annualized growth in the first quarter of 2010 at 3.7% and only 1.6% for the second quarter. 6 Several sectors show signs of recovery, but the national 5 Years in this report refer to federal fiscal years unless otherwise noted. Since 1977, federal fiscal years have started on October 1. Figures for FY1962-FY1968 from U.S. Office of Management and Budget, Budget for FY2011, Historical Tables, available at Figures for FY1969 and beyond from the U.S. Congressional Budget Office, Historical Tables, available at 6 Ibid. Congressional Research Service 2

7 unemployment rate, which was 9.6% in August 2010, is projected to fall slowly. 7 CBO estimates that the unemployment rate will not recede to the 5% level until Some economists have become more worried about the possibility of a double-dip recession, which would complicate existing budgetary challenges, although many forecasters do not predict a double-dip. How Has the Composition of Discretionary Spending Changed? In 1962, discretionary spending comprised 67.5% of total outlays, with mandatory spending and net interest accounting for 26.1% and 6.5%, respectively. Discretionary spending as a share of total outlays peaked in By 2009, discretionary spending fell to 35.2% of total outlays, though it increased to 37.8% in Mandatory spending accounted for 56.1% of total outlays, with net interest at 6.1% in Figure 1 shows discretionary and mandatory spending, and net interest payments categories defined in the Budget Enforcement Act (P.L ) since 1962 as a share of total outlays. The peak estimated in mandatory spending in 2009 is largely attributable to the state of the economy and enacted federal financial interventions, leading to an analogous spike in overall spending. This also led to a decline in discretionary spending s share of total outlays (from 38.0% in 2008 to 35.2% in 2009), though discretionary spending is estimated to rise in nominal terms. Over the longer term, discretionary spending s share of total outlays is projected to decline further. By 2020, according to CBO baseline projections that assume projected discretionary outlays hold steady in real terms, discretionary spending will fall to a historical low of 29.3% of total outlays U.S. Department of Labor, Bureau of Labor Statistics, The Employment Situation: August 2010, press release USDL , September 3, 2010, available at 8 U.S. Congressional Budget Office, The Budget and Economic Outlook: An Update, August 19, 2010, p. 1, available at 9 Mandatory spending without offsetting receipts was 57.7% of total outlays in With offsetting receipts, the figure was 53.2%. 10 Congressional Budget Office, Budget and Economic Outlook: An Update, August 2010, available at Congressional Research Service 3

8 Figure 1. Discretionary Outlays by BEA Category As a Percentage of Total Source: OMB. Notes: FY2010 values estimated; FY2011-FY2015 are President s proposed levels. Trends in discretionary spending as a share of gross domestic product (GDP) provides another perspective on how the composition of federal outlays has changed. Measuring budget components as a share of GDP compares their size to the economy as a whole, and implicitly incorporates inflation and population growth. Figure 2 shows components of federal spending as a percentage of GDP since Congressional Research Service 4

9 Figure 2. Components of Federal Spending, FY1962-FY2015 Source: OMB (February 2010 budget submission) and CRS calculations. Notes: FY2010 values estimated; FY2011-FY2015 are President s proposed levels. While discretionary spending was the largest component of federal spending until the mid-1970s, mandatory spending in 2009 accounted for nearly three-fifths of total federal spending. In 2009, mandatory spending accounted for about 6% more of GDP than discretionary spending, although that gap is expected to narrow to 3.9% in Medicare and Medicaid have continued to grow faster than overall federal spending, contributing to the majority of the increase in mandatory spending over this period. Social Security spending, the other large component of mandatory spending, has been relatively stable in the last decade when measured as a share of GDP. Total federal spending as a share of GDP is estimated to have peaked in 2009 as a result of the current economic situation and enacted federal financial interventions. While discretionary spending declined as a percentage of total outlays in 2009, it rose as a percentage of GDP because the economy shrank in 2008 and early Over the longer term, discretionary spending s share of GDP is projected to decline further. By 2020, discretionary spending is projected to fall to 6.7% of GDP, similar to the levels it reached in the late 1990s and early 2000s. Because of the decline in discretionary spending as a percentage of total outlays and as a percentage of GDP and the resulting increase in the share of mandatory spending over time, controlling the federal budget may have become more difficult for Congress. In other words, because net interest payments and mandatory spending are set automatically, less money is Congressional Research Service 5

10 available to allocate to other government agencies and programs unless revenues rise or Congress modifies eligibility requirements and benefits of mandatory spending programs. Discretionary Spending and National Priorities Discretionary spending can be subdivided into defense, domestic, and international categories. Such divisions may provide a rough indicator of national priorities as reflected in federal spending decisions. Figure 3 shows these categories of discretionary spending as a share of GDP over the period Discretionary defense spending as a percentage of GDP fell from 8.7% in 1969 to 3.0% in 2000, and then rose to an estimated 4.7% of GDP in Over the same period, domestic and international discretionary spending have changed less dramatically as a percentage of GDP. Domestic discretionary spending increased in the late 1970s but fell in subsequent decades as a share of the economy, remaining closer to its post-1969 average. Although discretionary spending has increased rapidly in the past half decade, spending in some government departments and agencies has grown very slowly or has been cut, while spending in other areas has expanded rapidly. Funding for defense and emergency and disaster management increased after the events of September 11, 2001, and even more sharply in the wake of Hurricane Katrina. In recent years, disaster funding has receded, allowing non-defense discretionary spending as a share of GDP to fall until federal responses to the economic recession pushed spending back up. Discretionary Defense Spending Defense spending increased sharply in the mid-1960s as the United States involvement in Vietnam deepened. After large-scale withdrawals of American troops from Vietnam began in 1969, defense spending as a share of GDP fell for the next decade. The Soviet invasion of Afghanistan prompted the Carter Administration, and then the Reagan Administration, to boost military expenditures resulting in an increase in defense spending during the early 1980s. After the Berlin Wall was opened in November 1989 and communist governments in central and eastern Europe collapsed, defense spending as a share of GDP dropped to historically low levels, providing what some called a peace dividend. Defense spending again rose after the attacks of September 11, 2001, and wars in Afghanistan and Iraq began. Congressional Research Service 6

11 Figure 3. Discretionary Outlays By Broad Category As a percentage of GDP Source: OMB and BEA. Notes: Defense is budget function 050, International is function 150, and Domestic is the remainder. FY2010 values estimated; FY2011-FY2015 levels are proposed by the President. FY2010 includes the Administration s request for a $33 billion supplemental for the Afghan surge. FY2010 reflects DOD s request for its base budget and an additional $159 billion for war costs. Increased defense spending accounted for 53% of the increase in discretionary spending in real terms over the past decade. Discretionary defense spending increased 6.8% per year on average in real terms between 2000 and Discretionary defense spending, which had fallen to 3.0% of GDP by the late 1990s, rose sharply to 4.0% of GDP in 2005, and is estimated to reach 4.7% of GDP in The trajectory of defense discretionary spending depends in large part on the scale of future operations in Iraq and Afghanistan, as well as on decisions about major procurement programs. The appropriate size of the defense budget has long been a lively topic of debate. In 2007, General Mike Mullen, Chairman of the Joint Chiefs of Staff, had said that he considered 4% of GDP an absolute floor for future defense spending. 12 Some analysts have expressed some 11 Defense discretionary spending includes enacted supplemental requests. OMB, Budget for Fiscal Year 2011, Historical Tables, Table 8.2, available at spending includes proposed $41.1 billion supplemental appropriation. 12 New York Times, October 22, Transcript available at (continued...) Congressional Research Service 7

12 doubts about the sustainability of current defense budget plans. 13 Others contend that defense expenditures as a proportion of GDP should be expected to fall over the long term because the cost of defending the nation depends on factors that are largely independent of economic growth. Secretary of Defense Robert Gates has called for cost-cutting measures within the Department of Defense, although the stated aim is not to reduce the Department s top-line budget number. 14 Discretionary Domestic Spending Trends in domestic discretionary spending are less dramatic. Domestic spending supports the largest number of federal agencies and programs, including science and technology research, natural resources, energy, education, and numerous others. None of the individual programs within the domestic discretionary category have approached 1% of GDP since Most of these programs spent less than 0.5% of GDP during that period. Domestic discretionary spending, 3.2% of GDP in 1969, rose to a peak of 4.8% in Domestic non-defense discretionary spending s share of GDP fell during the Reagan Administration, reaching 3.1% of GDP in Since then it has fluctuated between 3.0% and 3.6% of GDP. Domestic discretionary spending in 2009 accounted for 4.1% of GDP. Discretionary International Spending Discretionary spending for international programs since 1969 has averaged 0.3% of GDP, reaching its peak of 0.5% of GDP in Since that time, international spending has generally trended downward. Between 2001 and 2010, spending on international programs rose from 0.2% of GDP to 0.3% of GDP. The majority of the funding in this category in recent times has been devoted to diplomatic missions, foreign aid, and international finance. Discretionary Security and Non-Security Spending The G. W. Bush and Obama Administrations have each created their own division of security and non-security discretionary spending as a way of communicating their budgetary priorities. The Obama and Bush Administration budgets have presented summaries of discretionary funding that split out security spending from non-security spending. 16 Unlike the division of discretionary (...continued) 22mullen-text.html. 13 Testimony of CBO Assistant Director J. Michael Gilmore, in U.S. Congress, House Budget Committee, The 2009 Future Years Defense Program: Implications and Alternatives, hearings, 111 th Cong., 1 st sess., February 4, 2009; Testimony of CRS Specialist in Defense Policy and Budgets Stephen Daggett, in U.S. Congress, House Budget Committee, Sustainability of Current Defense Plans, hearings, 111 th Cong., 1 st sess., February 4, U.S. Secretary of Defense, Memorandum for Secretaries of the Military Departments, OSD , August 16, For a summary of Reagan-era spending changes, see David Stockman, The Triumph of Politics (New York: Harper&Row, 1986), pp For details, see U.S. Office of Management and Budget, Budget of the U.S. Government, FY2009, Tables S-2 and S- 4, and the Homeland Security Funding Analysis chapter in the Analytic Perspectives volume. In circular A-11, OMB defines federal homeland security activities as those that focus on combating and protecting against terrorism, and that occur within the United States and its territories, or outside of the United States and its territories if they support domestically-based systems or activities. Such activities include efforts to detect, deter, protect against, and, if needed, (continued...) Congressional Research Service 8

13 spending into the categories of domestic, international, and defense, which has become routine in budget analyses, no standard method of dividing security spending from non-security spending has been universally accepted. In particular, the G. W. Bush and Obama Administration definitions vary in significant ways. What is Homeland Security or Security Spending? Any division of spending into security and non-security components would likely present conceptual and practical difficulties. 17 Moreover, the widely used term homeland security, which comprises some but not all non-defense security spending, does not already readily translate in budgetary categories. Figure 4 provides a schematic view of Department of Defense and security spending as defined by the Obama Administration. The Obama Administration defines security spending as funding for: Department of Defense-Military; Department of Energy s National Nuclear Security Administration; International Affairs (function 150; includes State Department and some other agencies); Department of Homeland Security; and Department of Veterans Affairs. 18 Activities within budget subfunction 053 (Atomic Energy Defense Activities) outside of the National Nuclear Security Administration by this definition are classed as non-security. While the G. W. Bush Administration defined certain parts of the Department of Homeland Security within its security classification, the Obama Administration includes all of that department s funding. (...continued) respond to terrorist attacks. 17 For a discussion of defining security or homeland security, see U.S. Congressional Budget Office, Federal Funding for Homeland Security: An Update, Economic and Budget Issue Brief, July 20, See notes to U.S. Office of Management and Budget, Budget of the U.S. Government, FY2011, Tables S-11. Congressional Research Service 9

14 Figure 4. Defense and Security Spending Source: OMB, Dept. of Defense, CRS. Notes: See text. CRS-10

15 The G. W. Bush Administration defined security funding as spending on the Department of Defense, Homeland Security activities Government-wide; and International Affairs. 19 The Obama Administration includes funding for the Department of Veterans Affairs and excludes Justice Department agencies such as the Federal Bureau of Investigation (FBI) under its security rubric, while the Bush Administration s definition included the FBI and other law enforcement bureaus and excluded the Department of Veterans Affairs. Most homeland security spending, by either definition, takes place in the Department of Defense, the Department of Homeland Security, and the Department of Energy. Many other federal agencies spend at least some portion of their budget on what are arguably homeland security tasks, so that a significant amount of homeland security spending takes place in agencies and programs whose primary focus is not security oriented. Some federal activities, such as Coast Guard patrols and research at the Centers for Disease Control and Prevention, advance interests clearly linked to security objectives as well as those which are not. Moreover, some federal programs tasked with non-security aims in normal times may respond to specific homeland security challenges. These issues complicate budgetary analyses of homeland security spending. The President s budget submission must report homeland security spending. 20 This definition, drawn more narrowly than security, can exclude some activities not closely tied to security concerns, such as military bands. OMB s security spending estimates are based on reports from 32 agencies with homeland security responsibilities. Those agencies provide OMB with budget reports that provide a level of detail unavailable in publicly available data. Trends in Security and Non-Security Discretionary Spending Figure 5 shows trends in discretionary spending, divided into defense, non-defense security, and non-security categories in terms of budget authority, while Figure 6 shows the same categories in terms of outlays. Because budget authority can translate into outlays that stretch over several years, changes in outlays tend to be more gradual. Non-security discretionary spending (according to an approximation of the Bush Administration security spending definition), which had been about 6% of GDP in the late 1970s, dropped sharply in the early 1980s before stabilizing around 3% of GDP after Changes in nondefense security discretionary spending have been less dramatic. Table 2 shows average real growth rates for security and non-security components of discretionary spending. 19 U.S. Office of Management and Budget, Budget of the U.S. Government, FY2009, Table S The Homeland Security Act of 2002 (P.L ) requires this report, which supersedes a report on anti-terrorism activities mandated by the National Defense Authorization Act of 1998 (P.L ). An appendix (Homeland Security Mission Funding by Agency and Budget Account) was omitted from the printed FY2011 budget documents, but is available at 21 See the Appendix for details on these calculations. Congressional Research Service 11

16 Table 2. Average Real Growth in Discretionary Spending Using approximation of G. W. Bush Administration definition of security Time Period Total Non-Security Defense Non-Defense Security GDP FY2005-FY % 5.94% 5.34% 2.70% 3.28% FY2000-FY % 5.40% 6.79% 7.86% 4.06% FY1990-FY % 4.04% 2.18% 4.73% 4.79% Source: OMB, CRS calculations. Notes: Defense is Defense-Military function (050). See Appendix for definition of security spending. FY2010 outlays include proposed $41.1 billion supplemental appropriation. Congressional Research Service 12

17 Figure 5. Discretionary Budget Authority by Type Using FY2011 Definition of Security Source: Source: OMB and BEA. Notes: The security category here replicates totals presented in the FY2011 Budget submission (Summary Table S-11). Defense here includes Dept. of Defense-Military spending. Non-defense security includes Dept. of Energy s National Nuclear Security Admin., International Affairs (function 150), Dept. of Homeland Security and Dept. of Veterans Affairs. FY2010 values estimated; FY2011-FY2015 levels are proposed by the President. Some supplemental appropriations passed in 2010 may not be included. Graph by Andrew Austin, CRS. CRS-13

18 Figure 6. Discretionary Outlays by Type Using FY2011 Definition of Security Source: OMB and BEA. Notes: The security category here replicates totals presented in the FY2011 Budget submission (Summary Table S-11). Defense here includes Dept. of Defense-Military spending. Non-defense security includes Dept. of Energy s National Nuclear Security Admin., International Affairs (function 150), Dept. of Homeland Security and Dept. of Veterans Affairs. FY2010 values estimated; FY2011-FY2015 levels are proposed by the President. Some supplemental appropriations passed in 2010 may not be included. Graph by Andrew Austin, CRS. CRS-14

19 The Obama Administration in its first budget submission contended that many domestic priorities had been underfunded and proposed several cuts in defense spending, many of which Congress adopted. 22 The Obama Administration in its FY2011 submission, however, called for a three-year freeze on discretionary non-security spending. 23 Previously, the Bush Administration had said that holding down growth in non-security discretionary spending was a major fiscal priority. 24 Nonsecurity discretionary outlays (using the Bush Administration definition) rose from 3.1% of GDP in 2007 to 4.2% of GDP in 2010, after having increased earlier in the decade. Non-defense security discretionary budget authority increased sharply after Hurricane Katrina hit in 2005, while changes in outlays, shown in Figure 6, were less dramatic, in large part because the Gulf Coast recovery lasted longer than expected. 25 Fiscal Stimulus and the Budget Congress in early 2009 responded to weak economic conditions and dramatic job losses that sharply increased unemployment rates by passing a major fiscal stimulus package. 26 The resulting measure, the American Recovery and Reinvestment Act of 2009 (ARRA; H.R. 1, P.L ), enacted on February 17, 2009, included stimulus spending and tax cuts estimated at the time to total $787.2 billion. ARRA includes funds for discretionary spending on education initiatives, support for state governments, public housing, infrastructure, and health care. CBO more recently estimated the total budgetary effect of ARRA at $814 billion between 2009 and Certain Supplemental Nutrition Assistance Program (SNAP) benefits were cut by P.L (H.R. 1546), which is projected to reduce ARRA spending in future years. 28 Debate continues on whether additional economic stimulus would be appropriate. Some economists argue that weak economic growth and persistently high unemployment rates require additional fiscal stimulus. 29 Other economists are skeptical that Keynesian demand management would ameliorate deeper problems caused by high personal and federal debt levels. 30 On 22 For example, the Administration states that now is precisely the time for the country to make the long overdue investments that will fundamentally transform our economy so that we can compete and thrive in the decades ahead. U.S. Office of Management and Budget, A New Era of Responsibility: Renewing America s Promise, February, The proposed freeze in non-security discretionary spending is defined in terms of budgetary resources, which incorporates transportation funding obligation limitations. See notes to U.S. Office of Management and Budget, Budget of the U.S. Government, FY2011, Tables S U.S. Office of Management and Budget, Budget of the U.S. Government, FY2009, The Budget Message of the President, p More details on Homeland Security funding can be found in CRS Report RL34482, Homeland Security Department: FY2009 Appropriations, coordinated by Jennifer E. Lake. 26 For more information on budget issues, see CRS Report R41097, The FY2011 Federal Budget, by Mindy R. Levit. 27 U.S. Congressional Budget Office, Budget and Economic Outlook: An Update, August 2010, Box 1-2, available at 28 For details, see CRS Report R41374, Reducing SNAP (Food Stamp) Benefits Provided by the ARRA: P.L & S. 3307, by Joe Richardson, Jim Monke, and Gene Falk; and CBO, Budgetary Effects of Senate Amendment 4575, cost estimate, August 4, 2010, available at 29 Christina Romer, Not My Father s Recession: The Extraordinary Challenges and Policy Responses of the First Twenty Months of the Obama Administration, remarks at the National Press Club, September 1, 2010, available at 30 Kenneth Rogoff, Why America Isn t Working, Project Syndicate, September 1, 2010, available at Congressional Research Service 15

20 September 7, 2010, President Obama proposed a $50 billion package of infrastructure investments along with proposals to extend permanently certain R&D tax credits and other measures to stimulate business investment. 31 The FY2011 Budget and Beyond Budgetary priorities may change as the Obama Administration and Congress confront ongoing financial and economic challenges. In response to economic downturn, federal spending has automatically increased as more people have become eligible for income support programs and revenues have decreased as incomes of households and profits of many firms have fallen. These automatic stabilizers have a countercyclical effect, although most macroeconomists doubt that they would be themselves sufficient to stave off slow growth for the next few years. In addition to automatic stabilizers, the federal government has responded to this financial turmoil with an extraordinary set of measures aimed at housing and credit markets. In February 2008, Congress enacted a $152 billion package (P.L , Economic Stimulus Act of 2008) to stimulate consumption that sent refunds to taxpayers and let firms depreciate their capital more quickly. Later in the year, the Federal Reserve created a panoply of lending facilities to provide financial institutions with loans in exchange for various types of collateral. On October 3, Congress passed the Emergency Economic Stabilization Act of 2008 (EESA; P.L ), which authorized the Treasury Secretary to use $700 billion (subject to certain Congressional restrictions and notifications) to intervene in financial markets or to inject capital into key financial institutions as part of a Troubled Asset Relief Program (TARP). The ultimate costs of these responses and their budgetary impact will depend on how the economy performs, how well firms with federal credit guarantees weather future financial shocks, and whether the government receives positive returns on its asset purchases. Several major financial institutions have repaid TARP funds to Treasury. New shocks to the financial system and the economy could present Congress with new demands for federal responses. Many state governments continue to face significant budget challenges, residential and commercial real estate markets remain depressed in many parts of the country, and many households are struggling with high debt levels and an uncertain labor market. Mandatory spending tied to means-tested social programs has been increasing due to persistent unemployment, while federal revenues will likely fall as individuals incomes drop and corporate profits sink. Funding requests for military operations in Iraq and Afghanistan will likely continue. New policies and requests, if implemented, could affect discretionary spending levels in FY2011 and beyond. Discretionary Spending in the Long Term Congress can change, continue, or reverse trends in discretionary spending directly through annual appropriations decisions, or indirectly by modifying certain federal budget procedures, 31 Transportation Secretary Ray LaHood, President Proposes New Jobs, Renewed Infrastructure, White House blog, September 07, 2010, available at Congressional Research Service 16

21 such as reinstating statutory limits on discretionary spending. If discretionary spending were held constant in real terms, as the CBO baseline presumes, then discretionary spending per capita would decrease as population grows and it would shrink as a share of GDP as the economy grows. On average the U.S. population grew 1% a year and per capita GDP grew 2.25% per year from 1962 to If those trends were to persist, then holding discretionary spending constant in real terms implies per capita discretionary spending would shrink by 1% a year and discretionary spending as a share of the economy would shrink by 3.25% per year. Over the long run, growth in entitlement spending will present severe fiscal challenges. Recent research on long-term fiscal challenges has focused on continued increases in the per beneficiary cost of health care, as well as the more predictable demographic changes that will occur as the baby boom generation retires. Projections from a variety of sources predict that spending on Medicare and Social Security will increase sharply as a share of GDP in coming decades. 33 CBO projects that Medicare will expand from 4.0% of GDP in 2020 to 9.0% in 2050 and to 13.5% in Social Security outlays are projected to grow from 5.3% of GDP in 2020 to 6.0% of GDP by Federal Medicaid outlays, 1.8% of GDP in 2008, are projected to reach 3.2% of GDP in Social Security, Medicare, and Medicaid outlays as a proportion of GDP are projected to equal or exceed the present share of federal revenues as a proportion of GDP (17.7% in 2008) sometime before the middle of the 21 st century. Maintaining current levels of discretionary spending would then require either substantial tax increases or major changes in those entitlement programs. 32 These figures based on CRS calculations derived from CBO and Census Bureau data. 33 See U.S. Congressional Budget Office, Budget and Economic Outlook: Fiscal Years 2010 to 2010, January 2010, pp U.S. Congressional Budget Office, The Long-Term Budget Outlook, June 2009, available at doc.cfm?index= Congressional Research Service 17

22 Appendix. Approximating the Definition of Security Spending Used in the G. W. Bush Administration Table A-1 lists parts of the federal government whose funding is used to approximate the G..W. Bush Administration s definition of security spending. This approximation of security spending categories is defined using federal subfunction- and account-level data from the OMB Public Budget Database. Table A-1 specifies which items are included in this definition of security spending. This definition of security spending has the advantage that it can be applied over a longer period of time, providing historical context for current spending decisions. 35 This listing uses OMB function and subfunction codes along with specific account codes to identify agencies and programs that match, at least in large part, the definition of security spending put forth in the President s FY2009 budget submission. 36 As noted in the text, some activities such as U.S. Coast Guard harbor patrols may serve security and non-security ends. Some agencies, such as the Centers for Disease Control and Prevention, perform some tasks that are closely associated with security concerns as well as other tasks that are not. Finally, some grant programs designed to support non-security aims have been used to address security concerns such as recovery from the events of September 11, Figure A-1 shows trends in discretionary spending in terms of budget authority, divided by security and non-security categories using the approach described above. Figure A-2 presents those trends in terms of outlays. 35 OMB historical data from different years are not necessarily fully comparable due to changes in accounting treatment, redefinition of activity areas, changes in the structure of federal agencies, and for other technical reasons. 36 Office of Management and Budget, Budget of the U.S. Government FY2009, Analytic Perspectives, ch. 23, Homeland Security Funding Analysis. Congressional Research Service 18

23 Table A-1. Listing of Items Included in Security Category Used in CRS analysis of discretionary spending Subfunction code Within Departments Bureau or Purpose (within Dept.) Account Description 51 Department of Defense-Military All All All 53 Atomic energy defense activities All All All 54 Defense-related activities All All All 152 International security assistance All All All 153 Conduct of foreign affairs All All All 401 Ground transportation Dept. of Transportation 402 Air transportation Dept. of Homeland Security Dept. of Homeland Security 403 Water transportation Dept. of Homeland Security Dept. of Transportation 451 Community development Dept. of Homeland Security 453 Disaster relief and insurance Dept. of Homeland Security 551 Health care services Dept. of Homeland Security 552 Health research & training Dept. of Health and Human Services 751 Federal law enforcement All activities 754 Criminal Justice assistance Dept. of Homeland Security 809 Deductions for Offsetting Receipts 804 General property and records management Dept. of Homeland Security Dept. of Homeland Security 908 Other interest accounts Dept. of Homeland Security Source: Created by CRS, January 15, Transportation Security Agency Fed. Motor Carrier Safety Admin. Transportation Security Agency Security, Enforcement, & Investigations: Transportation Security 8274 Border Enforcement Program 508 U.S. Coast Guard 247 Port safety development Maritime Administration 1769 National Defense Tank Vessel Construction Program All All All Centers for Disease Control and Prevention All All All All All All Federal Protective Service 542 General Fund Proprietary Interest Receipts, nec 943 Disease Control, Research, and Training Note: The Security Spending category defined here will differ from Security spending categories developed by OMB and CBO, which are based on more detailed budget data. Congressional Research Service 19

24 Figure A-1. Discretionary Budget Authority by Type Using approximation of G. W. Bush Administration definition of security spending, as a percentage of GDP, FY1976-FY2015 Source: OMB and BEA. See text for definition of security category. The Security spending category defined here differs from Security spending categories developed by OMB and CBO. Defense includes subfunctions 051DOD-Military, 053 Atomic energy defense, and 054 Defense-related activities. Notes: FY2010 values estimated; FY2011-FY2015 levels are proposed by the President. Some supplemental appropriations passed in 2010 may not be included. CRS-20

25 Figure A-2. Discretionary Outlays by Type Using approximation of G. W. Bush Administration definition of security spending, as a percentage of GDP, FY1976-FY2015 Source: OMB and BEA. See text for definition of security category. The Security spending category defined here differs from Security spending categories developed by OMB and CBO. Defense includes subfunctions 051DOD-Military, 053 Atomic energy defense, and 054 Defense-related activities. Notes: FY2010 values estimated; FY2011-FY2015 levels are proposed by the President. Some supplemental appropriations passed in 2010 may not be included. CRS-21

26 Author Contact Information D. Andrew Austin Analyst in Economic Policy Mindy R. Levit Analyst in Public Finance Congressional Research Service 22